There’s a common misconception that wealthy people tend to be better with money than others. But making money and managing money can be two very different things, and some people learn that the hard way.
“[Wealthy people] make the same mistakes as everyone else does, but when you have a lot of money and you make those mistakes, there’s a lot more zeros on them,” said financial planner Mari Adam, client advisor and branch manager at Mercer Advisors.
To learn more about managing large sums of money wisely, we talked to financial planners about the biggest mistakes they’ve seen wealthy people make with their money.
1. Spending way too much
Between lavish homes, luxury cars, and pricey country club memberships, there’s an endless list of things that could tempt you to spend your cash. And when you have a lot of money coming in, it might be easy to overlook the amount that’s going out.
Adam said this is the No. 1 problem she sees among her wealthy clients. And that problem gets even bigger when they think they have enough to retire early.
Adam has seen once-high-earning professionals blow through their cash during retirement, only to come to her once they’ve gotten down to their last thousand dollars.
“If you’re not making money through work for 30, 40, or more years, you need an awful lot of money [to retire],” said Adam. “One of the common things we see with wealthy people is that even though they have a lot of money, it’s really not enough to support the lifestyle that they want to pursue.”
Maintaining a lifestyle during retirement, especially one of luxury, requires understanding how much money you will need for the long haul. That can be very difficult if you haven’t been investing, budgeting, and saving adequately over the years.
2. Not having a family mission statement
According to Jason Howell, a financial planner and family wealth advisor, it’s important to have a clear family mission statement when there’s a lot of money on the table. During the estate planning process, a family should decide what they want done with their money based on their values.
Those values should then be communicated to everyone who’s a part of the estate or may become part of the estate. It helps heirs and non-heirs understand why money is being allocated a certain way, including why a large chunk may be going to a charity instead of a family member. Howell said taking this intentional and proactive approach helps avoid confusion and conflict in the inheritance process.
“People feel badly or feel good based how they think they were valued as part of the family,” said Howell. “When you have these conversations, you’re explaining where you’re coming from, and if you’re going to have discord, it’s going to happen while you’re alive.”
3. Trusting too easily
Those who come into sudden wealth, such as an inheritance, lottery win, legal settlement, or sudden fame, but haven’t been trained to manage their money, can find themselves particularly vulnerable to bad investment opportunities.
“They end up trusting the wrong advisors and losing a lot of money. Professional athletes are the most vulnerable to this,” said Adam.
Adam said financial planners who specialize in dealing with the rich and famous often act more like financial bodyguards than planners. Their job is to keep bad investments — and bad actors — away from their clients and their fortunes.
Handling your wealth can feel like a full-time job. You have to know how to manage it, or at least have the right people managing it. Seeking advice from a certified financial planner, who is required to act in your best interest, is a good place to start.
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